UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended March 31, 2015
or
For the transition period from to
Commission File Number: 001-36228
Navient Corporation
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(302) 283-8000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value
NAVIENT CORPORATION
Table of Contents
Part I. Financial Information
Item 1.
Item 2.
Item 3.
Item 4.
PART II. Other Information
Item 1A.
Item 5.
Item 6.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
(Unaudited)
Assets
FFELP Loans (net of allowance for losses of $91 and $93, respectively)
Private Education Loans (net of allowance for losses of $1,849 and $1,916 respectively)
Investments
Available-for-sale
Other
Total investments
Cash and cash equivalents
Restricted cash and investments
Goodwill and acquired intangible assets, net
Other assets
Total assets
Liabilities
Short-term borrowings
Long-term borrowings
Other liabilities
Total liabilities
Commitments and contingencies
Equity
Common stock, par value $0.01 per share, 1.125 billion shares authorized: 429 million and 426 million shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income (net of tax benefit (expense) of $21 and $(5), respectively)
Retained earnings
Total Navient Corporation stockholders’ equity before treasury stock
Less: Common stock held in treasury at cost: 40 million and 24 million shares, respectively
Total Navient Corporation stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
Supplemental information — assets and liabilities of consolidated variable interest entities:
FFELP Loans
Private Education Loans
Net assets of consolidated variable interest entities
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Interest income:
Other loans
Cash and investments
Total interest income
Total interest expense
Net interest income
Less: provisions for loan losses
Net interest income after provisions for loan losses
Other income (loss):
Gains on sales of loans and investments
Gains (losses) on derivative and hedging activities, net
Servicing revenue
Asset recovery revenue
Gains on debt repurchases
Total other income
Expenses:
Salaries and benefits
Other operating expenses
Total operating expenses
Goodwill and acquired intangible asset impairment and amortization expense
Restructuring and other reorganization expenses
Total expenses
Income from continuing operations, before income tax expense
Income tax expense
Net income from continuing operations
Income (loss) from discontinued operations, net of tax expense (benefit)
Net income
Less: net loss attributable to noncontrolling interest
Net income attributable to Navient Corporation
Preferred stock dividends
Net income attributable to Navient Corporation common stock
Basic earnings per common share attributable to Navient Corporation:
Continuing operations
Discontinued operations
Total
Average common shares outstanding
Diluted earnings per common share attributable to Navient Corporation:
Average common and common equivalent shares outstanding
Dividends per common share attributable to Navient Corporation
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Other comprehensive income (loss):
Unrealized gains (losses) on derivatives:
Unrealized hedging gains (losses) on derivatives
Reclassification adjustments for derivative losses included in net income (interest expense)
Total unrealized gains (losses) on derivatives
Income tax benefit
Total other comprehensive income (loss), net of tax
Comprehensive income attributable to Navient Corporation
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in millions, except share and per share amounts)
Common Stock Shares
Balance at December 31, 2013
Comprehensive income:
Other comprehensive income (loss), net of tax
Total comprehensive income
Cash dividends:
Common stock ($.15 per share)
Preferred stock, series A ($.87 per share)
Preferred stock, series B ($.49 per share)
Dividend equivalent units related to employee stock-based compensation plans
Issuance of common shares
Tax benefit related to employee stock-based compensation plans
Stock-based compensation expense
Common stock repurchased
Shares repurchased related to employee stock-based compensation plans
Balance at March 31, 2014
Balance at December 31, 2014
Other comprehensive income, net of tax
Common stock ($.16 per share)
Noncontrolling interest in asset recovery business
Balance at March 31, 2015
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on loans and investments, net
Unrealized gains on derivative and hedging activities
Provisions for loan losses
(Increase) decrease in restricted cash — other
Decrease in accrued interest receivable
Decrease in accrued interest payable
Decrease in other assets
Increase in other liabilities
Total net cash provided by operating activities
Investing activities
Student loans acquired and originated
Reduction of student loans:
Installment payments, claims and other
Proceeds from sales of student loans
Other investing activities, net
Purchases of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Purchases of other securities
Proceeds from maturities of other securities
Decrease (increase) in restricted cash — variable interest entities
Purchase of subsidiary, net of cash acquired
Total net cash provided by investing activities
Financing activities
Borrowings collateralized by loans in trust — issued
Borrowings collateralized by loans in trust — repaid
Asset-backed commercial paper conduits, net
Other long-term borrowings issued
Other long-term borrowings repaid
Other financing activities, net
Retail and other deposits, net
Common stock dividends paid
Preferred stock dividends paid
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash disbursements made (refunds received) for:
Interest
Income taxes paid
Income taxes received
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)
On April 30, 2014, the spin-off of Navient from SLM Corporation (the “Spin-Off”) was completed and Navient became an independent, publicly traded company focused on loan management, servicing and asset recovery. The separation was completed through the distribution of 100 percent of the outstanding shares of Navient common stock, on the basis of one share of Navient common stock for each share of SLM Corporation common stock. SLM Corporation continues operation as a separate publicly traded company and includes Sallie Mae Bank and its Private Education Loan originations business and the Private Education Loans the bank held at the time of the separation.
Due to the relative significance of Navient to SLM Corporation prior to the Spin-Off, for financial reporting purposes, Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to SLM Corporation as constituted prior to the Spin-Off, notwithstanding the legal form of the Spin-Off. Since Navient is the accounting successor, the historical financial statements of SLM Corporation prior to the distribution on April 30, 2014 are the historical financial statements of Navient. As a result, the GAAP financial results reported in this Quarterly Report on Form 10-Q include the historical financial results of SLM Corporation prior to the Spin-Off on April 30, 2014 (i.e., such consolidated results include our loan management, servicing and asset recovery business and the consumer banking business associated with Sallie Mae Bank (“SLM BankCo”)) and reflect the deemed distribution of SLM BankCo to SLM Corporation’s stockholders on April 30, 2014.
Basis of Presentation
The accompanying unaudited, consolidated financial statements of Navient have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of Navient and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three-month period ended March 31, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our 2014 Form 10-K.
Reclassifications
Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2014 to be consistent with classifications adopted for 2015, and had no effect on net income, total assets, or total liabilities.
Recently Issued Accounting Pronouncements
Revenue Recognition
On May 28, 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet determined the effect of the standard on our ongoing financial reporting but do not expect it to be material.
The financial statements of Navient reflect the deemed distribution of SLM BankCo on April 30, 2014. As a result of the deemed distribution, all disclosures in this footnote as of a date prior to April 30, 2014 include SLM BankCo’s FFELP and Private Education Loans, whereas the disclosures as of December 31, 2014 and March 31, 2015 do not contain SLM BankCo’s FFELP and Private Education Loans.
Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.
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Allowance for Loan Losses Metrics
Allowance for Loan Losses
Beginning balance
Total provision
Charge-offs(1)
Reclassification of interest reserve(2)
Ending balance
Allowance:
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance: individually evaluated for impairment(3)
Ending balance: collectively evaluated for impairment(3)
Charge-offs as a percentage of average loans in repayment (annualized)
Allowance as a percentage of the ending total loan balance
Allowance as a percentage of the ending loans in repayment
Allowance coverage of charge-offs (annualized)
Ending total loans(3)
Average loans in repayment
Ending loans in repayment
Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.
Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.
Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.
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Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.
Key Credit Quality Indicators
FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation.
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For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.
Credit Quality Indicators
School Type/FICO Scores:
Traditional
Non-Traditional(1)
Cosigners:
With cosigner
Without cosigner
Seasoning(2):
1-12 payments
13-24 payments
25-36 payments
37-48 payments
More than 48 payments
Not yet in repayment
Defined as loans to customers attending for-profit schools (with a FICO score of less than 670 at origination) and customers attending not-for-profit schools (with a FICO score of less than 640 at origination).
Number of months in active repayment for which a scheduled payment was received.
Balance represents gross Private Education Loans.
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The following tables provide information regarding the loan status and aging of past due loans.
Loans in-school/grace/deferment(1)
Loans in forbearance(2)
Loans in repayment and percentage of each status:
Loans current
Loans delinquent 31-60 days(3)
Loans delinquent 61-90 days(3)
Loans delinquent greater than 90 days(3)
Total FFELP Loans in repayment
Total FFELP Loans, gross
FFELP Loan unamortized premium
Total FFELP Loans
FFELP Loan allowance for losses
FFELP Loans, net
Percentage of FFELP Loans in repayment
Delinquencies as a percentage of FFELP Loans in repayment
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance
Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.
Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.
The period of delinquency is based on the number of days scheduled payments are contractually past due.
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Total traditional loans in repayment
Total traditional loans, gross
Traditional loans unamortized discount
Total traditional loans
Traditional loans receivable for partially charged-off loans
Traditional loans allowance for losses
Traditional loans, net
Percentage of traditional loans in repayment
Delinquencies as a percentage of traditional loans in repayment
Loans in forbearance as a percentage of loans in repayment and forbearance
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.
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Total non-traditional loans in repayment
Total non-traditional loans, gross
Non-traditional loans unamortized discount
Total non-traditional loans
Non-traditional loans receivable for partially charged-off loans
Non-traditional loans allowance for losses
Non-traditional loans, net
Percentage of non-traditional loans in repayment
Delinquencies as a percentage of non-traditional loans in repayment
Receivable for Partially Charged-Off Private Education Loans
At the end of each month, for loans that are 212 days or more past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which have defaulted since 2007 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $380
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million and $334 million in the allowance for Private Education Loan losses at March 31, 2015 and 2014, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.
The following table summarizes the activity in the receivable for partially charged-off Private Education Loans.
Receivable at beginning of period
Expected future recoveries of current period defaults(1)
Recoveries(2)
Charge-offs(3)
Receivable at end of period
Allowance for estimated recovery shortfalls(4)
Net receivable at end of period
Represents the difference between the loan balance and our estimate of the amount to be collected in the future.
Current period cash collections.
Represents the current period recovery shortfall – the difference between what was expected to be collected and what was actually collected. These amounts are included in the Private Education Loan total charge-offs as reported in the “Allowance for Loan Losses Metrics” tables.
The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $1.8 billion and $2.1 billion overall allowance for Private Education Loan losses as of March 31, 2015 and 2014, respectively.
Troubled Debt Restructurings (“TDRs”)
We sometimes modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Approximately 53 percent and 51 percent of the loans granted forbearance have qualified as a TDR loan at March 31, 2015 and December 31, 2014, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan was $2.2 billion as of March 31, 2015 and December 31, 2014.
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At March 31, 2015 and December 31, 2014, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.
March 31, 2015
Private Education Loans — Traditional
Private Education Loans — Non-Traditional
December 31, 2014
The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.
The following table provides the average recorded investment and interest income recognized for our TDR loans.
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The following table provides information regarding the loan status and aging of TDR loans that are past due.
Loans in deferment(1)
Total TDR loans in repayment
Total TDR loans, gross
The following table provides the amount of loans modified in the periods presented that resulted in a TDR. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan.
Represents period ending balance of loans that have been modified during the period and resulted in a TDR.
Represents loans that charged off that were classified as TDRs.
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Accrued Interest Receivable
The following table provides information regarding accrued interest receivable on our Private Education Loans and our allowance for uncollectible interest.
The following table summarizes our borrowings.
Unsecured borrowings:
Senior unsecured debt
Total unsecured borrowings
Secured borrowings:
FFELP Loan securitizations
Private Education Loan securitizations
FFELP Loan — other facilities
Private Education Loan — other facilities
Other(1)
Total secured borrowings
Total before hedge accounting adjustments
Hedge accounting adjustments
“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.
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Variable Interest Entities
We consolidated the following financing VIEs as of March 31, 2015 and December 31, 2014, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.
Secured Borrowings — VIEs:
Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in our 2014 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in our 2014 Form 10-K for a full discussion.
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Summary of Derivative Financial Statement Impact
The following tables summarize the fair values and notional amounts of all derivative instruments at March 31, 2015 and December 31, 2014, and their impact on other comprehensive income and earnings for the three months ended March 31, 2015 and 2014.
Impact of Derivatives on Consolidated Balance Sheet
Hedged Risk
Exposure
Fair Values(1)
Derivative Assets:
Interest rate swaps
Cross-currency interest rate swaps
Other(2)
Total derivative assets(3)
Derivative Liabilities:
Floor Income Contracts
Total derivative liabilities(3)
Net total derivatives
Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.
“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.
The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:
(Dollar in millions)
Gross position
Impact of master netting agreements
Derivative values with impact of master netting agreements (as carried on balance sheet)
Cash collateral (held) pledged
Net position
The above fair values include adjustments for counterparty credit risk both for when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at March 31, 2015 and December 31, 2014 by $0 million and $18 million, respectively. In addition, the above fair values reflect adjustments for illiquid
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derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at March 31, 2015 and December 31, 2014 by $74 million and $73 million, respectively.
(Dollars in billions)
Notional Values:
Total derivatives
Impact of Derivatives on Consolidated Statements of Income
Fair Value Hedges:
Total fair value derivatives
Cash Flow Hedges:
Total cash flow derivatives
Trading:
Total trading derivatives
Less: realized gains (losses) recorded in interest expense
Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
Represents ineffectiveness related to cash flow hedges.
For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”
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Collateral
Collateral held and pledged related to derivative exposures between us and our derivative counterparties are detailed in the following table:
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(1)
Total collateral held
Derivative asset at fair value including accrued interest
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)
Total collateral pledged
Derivative liability at fair value including accrued interest and premium receivable
The trusts do not have the ability to sell or re-pledge securities they hold as collateral.
Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $639 million with our counterparties. Downgrades in our unsecured credit rating would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts based on our current unsecured credit rating. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $65 million and have posted $64 million of collateral to these counterparties. If these two counterparties exercised their right to terminate, we would be required to deliver additional assets of $1 million to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.
The following table provides the detail of our other assets.
Accrued interest receivable, net
Income tax asset, net current and deferred
Derivatives at fair value
Accounts receivable
Benefit and insurance-related investments
Fixed assets, net
Other loans, net
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Acquisitions are accounted for under the acquisition method of accounting as defined in ASC Topic 805, “Business Combinations.” The Company allocates the purchase price to the fair value of the acquired tangible assets, liabilities and identifiable intangible assets as of the acquisition date.
On February 20, 2015, Navient acquired a 97.9% controlling interest in Gila LLC. Gila LLC is an asset recovery and business process outsourcing firm serving more than 600 clients in 39 states. The firm provides receivables management services and account processing solutions for state governments, agencies, court systems and municipalities. We have engaged an independent appraiser to assist in the valuation of the assets acquired and liabilities assumed including identifiable intangible assets, primarily customer relationships, the trade name and developed technology. We anticipate the purchase price allocation will be completed by the end of the third quarter 2015. The results of operations of Gila LLC have been included in Navient’s consolidated financial statements since the acquisition date and are reflected in Navient’s Business Services segment results in “Note 12 — Segment Reporting.”
During the first-quarter 2015, there were no other changes or adjustments to goodwill and intangible assets.
The following table summarizes common share repurchases and issuances.
Common shares repurchased(1)
Average purchase price per share
Shares repurchased related to employee stock-based compensation plans(2)
Common shares issued(3)
Common shares purchased under our share repurchase programs, including share repurchase programs conducted by SLM Corporation prior to April 30, 2014.
Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.
Common shares issued under our various compensation and benefit plans, including shares issued by SLM Corporation prior to April 30, 2014.
The closing price of our common stock on March 31, 2015 was $20.33.
Dividend and Share Repurchase Program
In March 2015, we paid a common stock dividend of $0.16 per share, up from $0.15 per share in the prior quarter.
We repurchased 14.7 million shares of common stock for $300 million in the first quarter of 2015. The shares were repurchased under our January 2015 share repurchase program that authorizes up to $1 billion of share repurchases, of which $700 million remained available at March 31, 2015. In first-quarter 2014, SLM Corporation repurchased 8.4 million shares for $200 million.
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Basic earnings per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows.
(In millions, except per share data)
Numerator:
Denominator:
Weighted average shares used to compute basic EPS
Effect of dilutive securities:
Dilutive effect of stock options, non-vested restricted stock, restricted stock units and Employee Stock Purchase Plans (“ESPPs”)(1)
Dilutive potential common shares(2)
Weighted average shares used to compute diluted EPS
Basic earnings (loss) per common share attributable to Navient Corporation:
Diluted earnings (loss) per common share attributable to Navient Corporation:
Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested restricted stock, restricted stock units, and the outstanding commitment to issue shares under applicable ESPPs, determined by the treasury stock method.
For the three months ended March 31, 2015 and 2014, stock options covering approximately 4 million and 3 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.
We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Please refer to “Note 12 — Fair Value Measurements” in our 2014 Form 10-K for a full discussion.
During the three months ended March 31, 2015, there were no significant transfers of financial instruments between levels, or changes in our methodology or assumptions used to value our financial instruments.
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The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis.
Available-for-sale investments:
Agency residential mortgage-backed securities
Total available-for-sale investments
Derivative instruments:(1)
Liabilities(2)
Derivative instruments(1)
Fair value of derivative instruments excludes accrued interest and the value of collateral.
Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.
See “Note 5 — Derivative Financial Instruments” for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.
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The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.
Balance, beginning of period
Total gains/(losses) (realized and unrealized):
Included in earnings(1)
Included in other comprehensive income
Settlements
Transfers in and/or out of level 3
Balance, end of period
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)
“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:
Interest expense
Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
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The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.
Derivatives
Consumer Price Index/LIBOR basis swaps
to discount rate
(.05%)
Prime/LIBOR basis swaps
(.08%)
The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above would be expected to have the following impacts to the valuations:
Consumer Price Index/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation.
Prime/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input.
Cross-currency interest rate swaps — The unobservable inputs used in these valuations are Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as the term of the swap is increased. The opposite is true for an increase in the input.
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The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.
Earning assets
Cash and investments(1)
Total earning assets
Interest-bearing liabilities
Total interest-bearing liabilities
Derivative financial instruments
Excess of net asset fair value over carrying value
“Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $5 million and $5 million at March 31, 2015 and December 31, 2014, respectively, versus a fair value of $6 million and $6 million at March 31, 2015 and December 31, 2014, respectively.
Regulatory Matters
On May 2, 2014, Navient Solutions, Inc. (“NSI”), a wholly-owned subsidiary of Navient, and Sallie Mae Bank entered into consent orders with the Federal Deposit Insurance Corporation (the “FDIC”) (respectively, the “NSI Order” and the “Bank Order”; collectively, “the FDIC Orders”) to resolve matters related to certain cited violations of Section 5 of the Federal Trade Commission Act, including the disclosures and assessments of certain late fees, as well as alleged violations under the Servicemembers Civil Relief Act (“SCRA”). The FDIC Orders, which became effective upon the signing of the consent order with the United States Department of Justice (“DOJ”) by NSI and SLM BankCo on May 13, 2014, required NSI to pay $3.3 million in civil monetary penalties. NSI has paid its civil monetary penalties. In addition, the FDIC Orders required the establishment of a restitution reserve account totaling $30 million to provide restitution with respect to loans owned or originated by Sallie Mae Bank, from November 28, 2005 until the effective date of the FDIC Orders. Pursuant to the Separation and Distribution Agreement among SLM Corporation, SLM BankCo and Navient dated as of April 28, 2014 (the “Separation Agreement”), Navient funded the restitution reserve account in May 2014.
The NSI Order also required NSI to ensure proper servicing for service members and proper application of SCRA benefits under a revised and broader definition of eligibility than previously required by the statute and regulatory guidance and to make changes to billing statements and late fee practices. These changes to billing
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statements and late fee practices have already been implemented. NSI also decided to voluntarily make restitution of certain late fees to all other customers whose loans were neither owned nor originated by Sallie Mae Bank. They were calculated in the same manner as that which was required under the FDIC Orders and are estimated to be $42 million. The process to refund these fees as well as amounts from the restitution fund is substantially complete.
With respect to alleged civil violations of the SCRA, NSI and Sallie Mae Bank entered into a consent order with the DOJ. The DOJ consent order (“DOJ Order”) covers all loans either owned by Sallie Mae Bank or serviced by NSI from November 28, 2005 until the effective date of the settlement. The DOJ Order required NSI to fund a $60 million settlement fund, which represents the total amount of compensation due to service members under the DOJ agreement, and to pay $55,000 in civil money penalties. The DOJ Order was approved by the United States District Court in Delaware on September 29, 2014. Shortly thereafter, Navient funded the settlement fund and paid the civil money penalties pursuant to the terms of the order. On April 15, 2015, the DOJ approved the distribution plan for the settlement fund and we anticipate disbursements will begin in the second quarter of 2015.
The total reserves established by the Company in 2013 and 2014 to cover these costs were $177 million, and as of March 31, 2015, $73 million of those reserves remained. The final cost of these proceedings will remain uncertain until all of the work under the various consent orders has been completed.
As previously disclosed, the Company and various of its subsidiaries are subject to the following investigations and inquiries:
In December 2013, Navient received a Civil Investigative Demand (“CID”) issued by the State of Illinois Office of Attorney General and the State of Washington Office of the Attorney General and multiple other state Attorneys General in connection with these investigations. According to the CIDs, the investigations were initiated to ascertain whether any practices declared to be unlawful under the Consumer Fraud and Deceptive Business Practices Act have occurred or are about to occur.
In April 2014, NSI received a CID from the Consumer Financial Protection Bureau (the “CFPB”) as part of the CFPB’s separate investigation regarding allegations relating to Navient’s disclosures and assessment of late fees and other matters. Navient has been in discussions with the CFPB and has received a series of supplemental CIDs on these matters.
In November 2014, NSI’s subsidiary, Pioneer Credit Recovery, Inc. (“Pioneer”), received a CID from the CFPB as part of the CFPB’s investigation regarding Pioneer’s activities relating to rehabilitation loans and collection of defaulted student debt. Navient has been in discussions with the CFPB and has received a supplemental CID on these matters.
In December 2014, NSI received a subpoena from the New York Department of Financial Services (the “NY DFS”) as part of the NY DFS’s inquiry with regard to whether persons or entities have engaged in fraud or misconduct with respect to a financial product or service under New York Financial Services Law or other laws. Navient has been in discussions with the NY DFS relating to this matter.
In addition, Navient and its subsidiaries are subject to examination by the CFPB, FDIC, ED and various state agencies as part of its ordinary course of business. Items or matters similar to or different from those described above may arise during the course of those examinations.
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We are cooperating with these investigations, inquiries or examinations and are committed to resolving any potential concerns. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established.
Under the terms of the Separation Agreement, Navient agreed to be responsible for, and to indemnify SLM BankCo for, all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. As a result, all liabilities arising out of the regulatory matters mentioned above, other than fines or penalties directly levied against Sallie Mae Bank, are the responsibility of, or assumed by, Navient or one of its subsidiaries, and Navient has agreed to indemnify and hold harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank, therefrom. Navient has no additional reserves related to indemnification matters with SLM BankCo as of March 31, 2015 other than with respect to the FDIC Orders and the DOJ Order.
OIG Audit
The Office of the Inspector General (the “OIG”) of ED commenced an audit regarding Special Allowance Payments (“SAP”) on September 10, 2007. On September 25, 2013, we received the final audit determination of Federal Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG on August 3, 2009 related to this audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us to make adjustment to our government billing to reflect the policy determination. Navient remains in active discussions with ED on this matter and we also have the right to appeal the Final Audit Determination to the Administrative Actions and Appeals Service Group of ED. The last date to file an appeal in this matter has been extended by ED and is currently May 31, 2015. We continue to believe that our SAP billing practices were proper, considering then-existing ED guidance and lack of applicable regulations. The Company established a reserve for this matter in 2014 as part of the total reserve for pending regulatory matters discussed previously.
Contingencies
In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.
In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.
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Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.
FFELP Loans Segment
In the FFELP Loans segment, we acquire and finance FFELP Loans. Even though FFELP Loans are no longer originated due to changes in federal law that took effect in 2010, we continue to pursue acquisitions of FFELP Loan portfolios that leverage our servicing scale and generate incremental earnings and cash flow. In this segment, we primarily earn net interest income on the FFELP Loan portfolio. This segment is expected to generate significant amounts of earnings and cash flow as the portfolio amortizes.
Includes restricted cash and investments.
Private Education Loans Segment
In this segment, we acquire, finance and service Private Education Loans. Even though we no longer originate Private Education Loans, we continue to pursue acquisitions of Private Education Loan portfolios that leverage our servicing scale and generate incremental earnings and cash flow. In this segment, we primarily earn net interest income on the Private Education Loan portfolio (after provision for loan losses). This segment is expected to generate significant amounts of cash as the portfolio amortizes.
The following table includes GAAP-basis asset information for our Private Education Loans segment.
Private Education Loans, net
Business Services Segment
Our Business Services segment generates its revenue from servicing our FFELP Loan portfolio as well as providing servicing and asset recovery services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED, higher education institutions and other federal, state, court and municipal clients.
At March 31, 2015 and December 31, 2014, the Business Services segment had total assets of $643 million and $416 million, respectively, on a GAAP basis.
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Other Segment
Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all unallocated overhead. We also include results from certain smaller wind-down and discontinued operations within this segment. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology costs related to infrastructure and operations.
At March 31, 2015 and December 31, 2014, the Other segment had total assets of $2.7 billion and $2.1 billion, respectively, on a GAAP basis.
Measure of Profitability
We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.
“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for three items, discussed below, that are either related to the Spin-Off or create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the three items we remove to result in our “Core Earnings” presentations are:
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core
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Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.
Segment Results and Reconciliations to GAAP
Student loans
Net interest income (loss)
Net interest income (loss) after provisions for loan losses
Other income (loss)
Total other income (loss)
Direct operating expenses
Overhead expenses
Operating expenses
Goodwill and acquired intangible asset impairment and amortization
Income (loss) from continuing operations, before income tax expense (benefit)
Income tax expense (benefit)(3)
Net income (loss) from continuing operations
Net income (loss)
The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
“Core Earnings” adjustments to GAAP:
Total “Core Earnings” adjustments to GAAP
Income taxes are based on a percentage of net income before tax for the individual reportable segment.
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Total other loss
Income (loss) from discontinued operations
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Summary of “Core Earnings” Adjustments to GAAP
Net impact of the removal of SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off(1)
Net impact of derivative accounting(2)
Net impact of goodwill and acquired intangibles assets(3)
Net tax effect(4)
Net effect from discontinued operations and noncontrolling interest
SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off: For “Core Earnings,” we have assumed the consumer banking business (SLM BankCo) was never a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014 and we have removed the restructuring and reorganization expense incurred in connection with the Spin-Off. Excluding these items provides management with a useful basis from which to better evaluate results from ongoing operations against results from prior periods. The adjustment relates to the exclusion of the consumer banking business and represents the operations, assets, liabilities and equity of SLM BankCo, which is comprised of Sallie Mae Bank, Upromise Rewards, the Insurance Business, and the Private Education Loan origination functions. Included in these amounts are also certain general corporate overhead expenses related to the consumer banking business. General corporate overhead consists of costs primarily associated with accounting, finance, legal, human resources, certain information technology costs, stock compensation, and executive management and the board of directors. These costs were generally allocated to the consumer banking business based on the proportionate level of effort provided to the consumer banking business relative to SLM Corporation using a relevant allocation driver (e.g., in proportion to the number of employees by function that were being transferred to SLM BankCo as opposed to remaining at Navient). All intercompany transactions between SLM BankCo and Navient have been eliminated. In addition, all preferred stock dividends have been removed as SLM BankCo succeeded SLM Corporation as the issuer of the preferred stock in connection with the Spin-Off.
Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our FFELP Loans, Private Education Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.
Goodwill and acquired intangible assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and amortization of acquired intangible assets.
Net tax effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year.
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The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”).
This Quarterly Report on Form 10-Q contains “forward-looking” statements and information based on management’s current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in our 2014 Form 10-K and subsequent filings with the Securities and Exchange Commission (“SEC”); increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which we are a party; credit risk associated with our exposure to third parties, including counterparties to our derivative transactions; risks inherent in the government contracting environment, including the possible loss of government contracts and potential civil and criminal penalties as a result of governmental investigations or audits; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). We could also be affected by, among other things: changes in our funding costs and availability; reductions to our credit ratings or the credit ratings of the United States of America; failures of our operating systems or infrastructure, or those of third-party vendors; risks related to cybersecurity including the potential disruption of our systems or potential disclosure of confidential customer information; damage to our reputation; failures to successfully implement cost-cutting initiatives and adverse effects of such initiatives on our business; failures or delays in the planned conversion to our servicing platform of the recently acquired Wells Fargo portfolio of Federal Family Education Loan Program (“FFELP”) loans or any other FFELP or Private Education Loan portfolio acquisitions; risks associated with restructuring initiatives; risks associated with the April 30, 2014 separation of Navient and SLM Corporation into two, distinct publicly traded companies, including failure to achieve the expected benefits of the separation; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of our customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of our earning assets versus our funding arrangements; changes in general economic conditions; our ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. We do not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in our expectations.
Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our 2014 Form 10-K.
Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.
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Spin-Off of Navient
Due to the relative significance of Navient to SLM Corporation prior to the Spin-Off, for financial reporting purposes, Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to SLM Corporation as constituted prior to the Spin-Off, notwithstanding the legal form of the Spin-Off. Since Navient is the accounting successor, the historical financial statements of SLM Corporation prior to the distribution on April 30, 2014, are the historical financial statements of Navient. As a result, the GAAP financial results reported in this Quarterly Report on Form 10-Q include the historical financial results of SLM Corporation prior to the Spin-Off on April 30, 2014 (i.e., such consolidated results include our loan management, servicing and asset recovery business and the consumer banking business associated with Sallie Mae Bank (“SLM BankCo”)) and reflect the deemed distribution of SLM BankCo to SLM Corporation’s stockholders on April 30, 2014. See “‘Core Earnings’ — Definitions and Limitations” for a discussion of the exclusion of the pre-Spin-Off financial results of the consumer banking business from our “Core Earnings” results.
Navient’s Business
Navient is the nation’s leading loan management, servicing and asset recovery company, committed to helping customers navigate the path to financial success. Servicing more than $300 billion in student loans, Navient supports the educational and economic achievements of more than 12 million customers. A growing number of government and higher education clients rely on Navient for proven solutions to meet their financial goals. Navient began trading on Nasdaq as an independent company on May 1, 2014. Our website is navient.com. Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Quarterly Report on Form 10-Q.
Navient holds the largest portfolio of education loans insured or guaranteed under the Federal Family Education Loan Program (“FFELP”), as well as the largest portfolio of Private Education Loans. FFELP Loans are insured or guaranteed by state or not-for-profit agencies based on guaranty agreements among the United States Department of Education (“ED”) and these agencies. Private Education Loans are education loans to students or their families that bear the full credit risk of the customer and any cosigner. Private Education Loans are made primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or students’ and families’ resources.
Navient services its own portfolio of education loans, as well as those owned by banks, credit unions, non-profit education lenders and ED. Navient is one of four large servicers to ED under its Direct Student Loan Program (“DSLP”). Navient also provides asset recovery services on its own portfolio (consisting of both education loans as well as other asset classes), guaranty agencies, higher education institutions, ED and other federal clients, as well as states, courts, and municipalities.
As of March 31, 2015, Navient’s principal assets consisted of:
$102.4 billion in FFELP Loans, with a student loan spread of 0.96 percent for the quarter ended March 31, 2015 on a “Core Earnings” basis and a weighted average life of 7.3 years;
$29.0 billion in Private Education Loans, with a student loan spread of 3.87 percent for the quarter ended March 31, 2015 on a “Core Earnings” basis and a weighted average life of 7.0 years;
a leading student loan servicing platform that services loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.2 million customer accounts serviced under Navient’s contract with ED; and
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a leading student loan asset recovery platform with an outstanding inventory of contingent asset recovery receivables of approximately $20.2 billion, of which approximately $11.0 billion was student loans and the remainder was other asset classes.
Navient’s Strengths and Opportunities
Navient possesses a number of competitive advantages that distinguishes it from its competitors, including:
Large, high quality asset base generating significant and predictable cash flows. At March 31, 2015, Navient’s $131.4 billion student loan portfolio is 75 percent funded to term and is expected to produce consistent and predictable cash flows over the remaining life of the portfolio. Navient’s $102.4 billion portfolio of FFELP Loans bears a maximum 3 percent loss exposure due to the federal guarantee. Navient’s $29.0 billion portfolio of Private Education Loans bears the full credit risk of the borrower and cosigner. Navient expects that cash flows from its FFELP Loan and Private Education Loan portfolios will significantly exceed future debt service obligations.
Efficient and large scale servicing platform. Navient is the largest servicer of education loans, servicing over $300 billion in student loans for more than 12 million customers. Navient has demonstrated scalable infrastructure with capacity to add volume at a low cost. Navient’s premier market share and tested servicing and asset recovery infrastructure make it well-positioned to expand its servicing and asset recovery businesses to additional third-party FFELP, federal, private and other loan portfolios.
Superior operating performance. Navient has demonstrated superior default prevention performance and industry leading asset recovery services. The combined portfolio of federal loans serviced by Navient experienced a Cohort Default Rate 40 percent lower than the most recent national rate released by ED in September 2014. We are consistently a top performer in our asset recovery business as well.
Commitment to compliance and customer centricity. Navient fosters a robust compliance culture driven by a “customer first” approach. We invest in rigorous training programs, internal and external auditing, escalated service tracking and analysis, and customer research to enhance our compliance and customer service.
Strong capital return. As a result of its significant cash flow and capital generation, Navient expects to return excess capital to stockholders through dividends and share repurchases. In December 2014, Navient’s board of directors authorized $1 billion to be utilized in a new common share repurchase program effective January 1, 2015. Navient increased its quarterly dividend amount from $0.15 per share to $0.16 per share effective for its first-quarter 2015 dividends. For the quarter ended March 31, 2015, we paid $63 million in dividends on shares of our common stock and repurchased $300 million of our shares of common stock.
Meaningful growth opportunities. Navient will pursue opportunistic acquisitions of FFELP and Private Education Loan portfolios. During the first quarter, Navient acquired $830 million of student loans. Navient will also pursue additional third-party servicing and asset recovery fee income opportunities. In February 2015, Navient completed the acquisition of Gila LLC, an asset recovery and business process outsourcing firm serving more than 600 clients in 39 states. The firm provides receivables management services and account processing solutions for state governments, court systems and municipalities. Navient will leverage its large-scale servicing platform, superior default prevention and asset recovery performance, operating efficiency and regulatory compliance and risk management infrastructure in pursuing other growth opportunities.
Navient’s Approach to Assisting Students and Families in Repaying their Education Loans
Navient services loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.2 million customer accounts serviced under Navient’s contract with ED. In this work, we help our customers experience success through proactive outreach and emphasis on identifying the payment plan that best fits their budget and financial goals.
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We understand managing repayment of education loans is critical for students to achieve their educational goals, recognize their full earning potential and develop a strong credit profile.
Customer success means making steady progress toward repayment, instead of falling behind on payments. Our experience has taught us that the transition from school to full repayment requires customer contact and counseling. For many customers, student loans are their first borrowing experience. For new graduates, salaries grow over time, typically making payments easier to handle as their career progresses. It is also not uncommon for some to return to school, experience illness or encounter temporary interruptions in earnings.
To help customers manage these realities, Navient makes customer success and default prevention top priorities. We customize our outreach using data-driven approaches that draw from our more than 40 years of experience in helping customers successfully manage their loans. As a result, our customers experience higher records of repayment success as evidenced by lower delinquencies and defaults.
We have been a partner in ED’s campaign to inform federal student loan customers about income-driven repayment plans, and have played a leadership role in helping customers understand their options and make an informed choice.
We also find that customers who have fallen behind benefit from outreach and assistance. In fact, nine times out of ten when we can reach federal loan customers who have missed payments, we can identify a solution to help them avoid default.
We also offer free resources to help customers and the general public build knowledge on personal finance topics. In October 2014, we launched new online resources to encourage financial literacy and to help customers understand their repayment options and enroll in the plan that is best for them.
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Selected Historical Financial Information and Ratios
Although SLM BankCo is the entity that distributed the shares of Navient common stock to SLM BankCo common stockholders, for financial reporting purposes, Navient is treated as the “accounting spinnor” and therefore Navient, and not SLM BankCo, is the “accounting successor” to SLM Corporation. Hence, the following GAAP financial information to the extent related to periods on or prior to April 30, 2014 reflects the historical results of operations and financial condition of SLM Corporation, which is the accounting predecessor of Navient. For a discussion of how “Core Earnings” results are different than GAAP results, see “‘Core Earnings’ — Definition and Limitations” and “Differences between ‘Core Earnings’ and GAAP.”
GAAP Basis
Diluted earnings per common share attributable to Navient Corporation
Weighted average shares used to compute diluted earnings per common share
Net interest margin, FFELP Loans
Net interest margin, Private Education Loans
Return on assets
Ending FFELP Loans, net
Ending Private Education Loans, net
Ending total student loans, net
Average FFELP Loans
Average Private Education Loans
Average total student loans
“Core Earnings” Basis(1)
“Core Earnings” are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations” and subsequent sections.
Overview
The following discussion and analysis presents a review of our business and operations as of and for the three months ended March 31, 2015.
We monitor and assess our ongoing operations and results based on the following four reportable segments: (1) FFELP Loans (2) Private Education Loans, (3) Business Services and (4) Other. Our segment presentation excludes the results of the consumer banking business distributed on April 30, 2014. See “‘Core Earnings’ — Definition and Limitations” for further discussion.
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Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all unallocated overhead. We also include results from certain smaller wind-down and discontinued operations within this segment.
Key Financial Measures
Our operating results are primarily driven by net interest income from our student loan portfolios, provision for loan losses, the revenues and expenses generated by our servicing and asset recovery businesses, and gains and losses on subsidiary sales, loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures (net interest income; provisions for loan losses; charge-offs and delinquencies; servicing and asset recovery revenues; other income (loss); and operating expenses) can be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 Form 10-K.
First-Quarter 2015 Summary of Results
We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, board of directors, credit rating agencies, lenders and investors use these “Core Earnings” measures to monitor our business performance. See “‘Core Earnings’ — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and “Core Earnings.”
First-quarter 2015 GAAP net income was $292 million ($0.72 diluted earnings per share), versus net income of $219 million ($0.49 diluted earnings per share) in the first-quarter 2014. The changes in GAAP net income are impacted by the same “Core Earnings” items discussed below, as well as changes in net income attributable to (1) the financial results attributable to the operations of the consumer banking business prior to the April 30, 2014 spin-off of Navient from SLM Corporation, and related restructuring and reorganization expense incurred in connection with the Spin-Off, (2) unrealized, mark-to-market gains/losses on derivatives and (3) goodwill and acquired intangible asset amortization and impairment. These items are recognized in GAAP but have not been included in “Core Earnings” results. First-quarter 2015 GAAP results included gains of $166 million from
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derivative accounting treatment that are excluded from “Core Earnings” results, compared with gains of $99 million in the year-ago period. See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” for a complete reconciliation between GAAP net income and “Core Earnings.”
“Core Earnings” for the quarter were $194 million ($0.48 diluted earnings per share), compared with $142 million ($0.33 diluted earnings per share) for the year-ago quarter. Excluding expenses associated with regulatory matters, first-quarter 2015 and 2014 diluted “Core Earnings” per share were $0.48 and $0.49, respectively. This decrease was primarily the result of a $26 million decline in net interest income and a $23 million increase in operating expenses, which was partially offset by a $21 million decrease in provisions for loan losses and less common shares outstanding.
During the first three months of 2015, we:
acquired $830 million of student loans;
issued $1.0 billion of FFELP asset-backed securities (“ABS”), $689 million of Private Education Loan ABS and $500 million of unsecured debt;
repurchased 14.7 million common shares for $300 million on the open market; and
paid a common stock dividend of $0.16 per share, up from $0.15 per share in the prior quarter.
Results of Operations
We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Private Education Loans, Business Services and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a “Core Earnings” basis (see “‘Core Earnings’ — Definition and Limitations”).
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GAAP Statements of Income (Unaudited)
Other income
Income from discontinued operations, net of tax expense
Basic earnings per common share attributable to Navient Corporation
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Consolidated Earnings Summary — GAAP-basis
Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014
For the three months ended March 31, 2015, net income was $292 million, or $0.72 diluted earnings per common share, compared with net income of $219 million, or $0.49 diluted earnings per common share, for the three months ended March 31, 2014. The increase in net income was primarily due to a $136 million decrease in operating expenses, a $23 million decrease in restructuring and other reorganization expenses, a $79 million increase in net gains on derivative and hedging activities and a $60 million decline in the provisions for loan losses. This was partially offset by a $183 million decline in net interest income.
The primary contributors to each of the identified drivers of changes in net income for the current quarter compared with the year-ago quarter are as follows:
Net interest income decreased by $183 million, of which $140 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was a reduction in Private Education Loan net interest income due to a decline in the balance and net interest margin.
Provisions for loan losses declined $60 million, of which $39 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.
Gains (losses) on derivative and hedging activities, net, increased $79 million. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.
Servicing and asset recovery revenue decreased $6 million in total. Asset recovery revenue decreased $22 million primarily as a result of the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduced the amount paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated. This legislative reduction in fees represents $40 million of the decrease in asset recovery revenue. This reduction was partially offset by higher asset recovery volume and revenue from the Gila LLC acquisition.
In the first quarter of 2014, we recorded $103 million of expenses related to the settlement of regulatory matters. Excluding these expenses, operating expenses decreased $33 million. This decrease was primarily due to $48 million related to the deemed distribution of SLM BankCo on April 30, 2014, partially offset by incremental costs resulting from operating as a new separate company, costs related to the Gila LLC acquisition this quarter, as well as incremental third-party servicing expenses related to an $8.5 billion loan acquisition in fourth-quarter 2014.
Restructuring and other reorganization expenses decreased $23 million to $3 million. These expenses were primarily related to costs incurred in connection with the Spin-Off.
We repurchased 14.7 million and 8.4 million shares of our common stock during the three months ended March 31, 2015 and 2014, respectively, as part of our common share repurchase programs. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 30 million common shares from the year-ago quarter.
“Core Earnings” — Definition and Limitations
We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we
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allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.
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The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 12 — Segment Reporting.”
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Loss from discontinued operations
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Differences between “Core Earnings” and GAAP
The following discussion summarizes the differences between “Core Earnings” and GAAP net income and details each specific adjustment required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.
“Core Earnings” net income attributable to Navient Corporation
Net impact of the removal of SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off
Net impact of derivative accounting
Net impact of goodwill and acquired intangible assets
Net tax effect
Net impact of discontinued operations and noncontrolling interest
GAAP net income attributable to Navient Corporation
1) SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off: On April 30, 2014, the Spin-Off of Navient from SLM Corporation was completed and Navient became an independent, publicly-traded company. Due to the relative significance of Navient to SLM Corporation prior to the Spin-Off, among other factors, for financial reporting purposes Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to SLM Corporation as constituted prior to the Spin-Off, notwithstanding the legal form of the Spin-Off. Since Navient is treated for accounting purposes as the “accounting spinnor,” the GAAP financial statements of Navient reflect the deemed distribution of SLM BankCo to SLM BankCo’s stockholders on April 30, 2014.
For “Core Earnings,” we have assumed SLM BankCo was never a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014 and we have removed the restructuring and reorganization expense incurred in connection with the Spin-Off. Excluding these items provides management with a useful basis from which to better evaluate results from ongoing operations against results from prior periods. The adjustment relates to the exclusion of the consumer banking business and represents the operations, assets, liabilities and equity of SLM BankCo, which is comprised of Sallie Mae Bank, Upromise Rewards, the Insurance Business, and the Private Education Loan origination functions. Included in these amounts are also certain general corporate overhead expenses related to the consumer banking business. General corporate overhead consists of costs primarily associated with accounting, finance, legal, human resources, certain information technology costs, stock compensation, and executive management and the board of directors. These costs were generally allocated to the consumer banking business based on the proportionate level of effort provided to the consumer banking business relative to SLM Corporation using a relevant allocation driver (e.g., in proportion to the number of employees by function that were being transferred to SLM BankCo as opposed to remaining at Navient). All intercompany transactions between SLM BankCo and Navient have been eliminated. In addition, all prior preferred stock dividends have been removed as SLM BankCo succeeded SLM Corporation as the issuer of the preferred stock in connection with the Spin-Off.
SLM BankCo net income, before income tax expense
Restructuring and reorganization expense in connection with the Spin-Off
Total net impact of SLM BankCo, before income tax expense
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2) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our FFELP Loans, Private Education Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts, where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment.
Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the student loans. Under derivative accounting treatment, the upfront contractual payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio earning Floor Income but that offsetting change in value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for purposes of “Core Earnings,” we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net contractual premiums received on the Floor Income Contracts. The amortization of the net contractual premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains (losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.
Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our student loan assets that are primarily indexed to LIBOR or Prime. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.
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The table below quantifies the adjustments for derivative accounting between GAAP and “Core Earnings” net income.
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income
Plus: Realized losses on derivative and hedging activities, net(1)
Unrealized gains on derivative and hedging activities, net(2)
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”
Other derivative accounting adjustments(3)
Total net impact of derivative accounting(4)
See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.
“Unrealized gains on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):
Basis swaps
Foreign currency hedges
Total unrealized gains on derivative and hedging activities, net
Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustment are reversed for “Core Earnings” and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under “Core Earnings” and, as a result, such gains or losses amortized into “Core Earnings” over the life of the hedged item.
Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.
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Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities
Derivative accounting requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense. The table below summarizes the realized losses on derivative and hedging activities and the associated reclassification on a “Core Earnings” basis.
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income
Net settlement income on interest rate swaps reclassified to net interest income
Net realized gains on terminated derivative contracts reclassified to other income
Total reclassifications of realized losses on derivative and hedging activities
Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”
As of March 31, 2015, derivative accounting has reduced GAAP equity by approximately $505 million as a result of cumulative net unrealized losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized after tax net losses related to derivative accounting.
Beginning impact of derivative accounting on GAAP equity
Net impact of net unrealized gains (losses) under derivative accounting(1)
Ending impact of derivative accounting on GAAP equity
Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:
Total pre-tax net impact of derivative accounting recognized in net income(a)
Tax impact of derivative accounting adjustments recognized in net income
Change in unrealized gain (losses) on derivatives, net of tax recognized in other comprehensive income
Net impact of net unrealized gains (losses) under derivative accounting
See “‘Core Earnings’ derivative adjustments” table above.
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Hedging FFELP Loan Embedded Floor Income
Net Floor premiums received on Floor Income Contracts that have not been amortized into “Core Earnings” as of the respective year-ends are presented in the table below. These net premiums will be recognized in “Core Earnings” in future periods. As of March 31, 2015, the remaining amortization term of the net floor premiums was approximately 4.8 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.
In addition to using Floor Income Contracts, we also use pay fixed interest rate swaps to hedge the embedded Floor Income within FFELP Loans. These interest rate swaps qualify as GAAP hedges and are accounted for as cash flow hedges of variable rate debt. For GAAP, gains and losses on the effective portion of these hedges are recorded in accumulated other comprehensive income and gains and losses on the ineffective portion are recorded immediately to earnings. Hedged Floor Income from these cash flow hedges that has not been recognized into “Core Earnings” and GAAP as of the respective period-ends is presented in the table below. This hedged Floor Income will be recognized in “Core Earnings” and GAAP in future periods and is presented net of tax. As of March 31, 2015, the hedged period is from April 2016 through December 2019. Historically, we have used pay fixed interest rate swaps on a periodic basis to hedge embedded Floor Income and depending upon market conditions and pricing, we may enter into swaps in the future. The balance of unrecognized hedged Floor Income will increase as we enter into new swaps and decline as revenue is recognized.
Unamortized net Floor premiums (net of tax)
Unrecognized hedged Floor Income related to pay fixed interest rate swaps (net of tax)
Total(1)
$(916) million and $(492) million on a pre-tax basis as of March 31, 2015 and 2014, respectively.
3) Goodwill and Acquired Intangible Assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.
“Core Earnings” goodwill and acquired intangible asset adjustments(1)
Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.
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Business Segment Earnings Summary — “Core Earnings” Basis
The following table includes “Core Earnings” results for our FFELP Loans segment.
“Core Earnings” interest income:
Total “Core Earnings” interest income
Total “Core Earnings” interest expense
Net “Core Earnings” interest income
Less: provision for loan losses
Net “Core Earnings” interest income after provision for loan losses
Income before income tax expense
“Core Earnings”
“Core Earnings” from the FFELP Loans segment were $85 million in the first quarter of 2015, compared with $64 million in the year-ago quarter. This increase was primarily the result of $7 million more net interest income due to an increase in the balance of, and net interest margin on, the portfolio, a $7 million increase in servicing fees, a $9 million decrease in operating expenses and a $5 million decline in the provision for FFELP Loan losses. “Core Earnings” key performance metrics are as follows:
FFELP Loan spread
Net interest margin
Provision for loan losses
Charge-offs
Charge-off rate
Total delinquency rate
Greater than 90-day delinquency rate
Forbearance rate
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FFELP Loan Net Interest Margin
The following table includes the “Core Earnings” basis FFELP Loan net interest margin along with reconciliation to the GAAP-basis FFELP Loan net interest margin.
“Core Earnings” basis FFELP Loan yield
Hedged Floor Income
Unhedged Floor Income
Consolidation Loan Rebate Fees
Repayment Borrower Benefits
Premium amortization
“Core Earnings” basis FFELP Loan net yield
“Core Earnings” basis FFELP Loan cost of funds
“Core Earnings” basis FFELP Loan spread
“Core Earnings” basis other interest-earning asset spread impact
“Core Earnings” basis FFELP Loan net interest margin(1)
Adjustment for GAAP accounting treatment(2)
GAAP-basis FFELP Loan net interest margin(1)
The average balances of our FFELP Loan “Core Earnings” basis interest-earning assets for the respective periods are:
Other interest-earning assets
Total FFELP Loan “Core Earnings” basis interest-earning assets
Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income, the reversal of the amortization of premiums received on Floor Income Contracts, and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.
As of March 31, 2015, our FFELP Loan portfolio totaled $102.4 billion, composed of $39.9 billion of FFELP Stafford loans and $62.5 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of March 31, 2015 was 4.8 years and 8.9 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 3 percent and 3 percent, respectively.
Floor Income
The following table analyzes on a “Core Earnings” basis the ability of the FFELP Loans in our portfolio to earn Floor Income after March 31, 2015 and 2014, based on interest rates as of those dates.
Student loans eligible to earn Floor Income
Less: post-March 31, 2006 disbursed loans required to rebate Floor Income
Less: economically hedged Floor Income Contracts
Student loans earning Floor Income
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The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged with derivatives for the period April 1, 2015 to December 31, 2019.
Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged
Operating Expenses — FFELP Loans
Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged by the Business Services segment and included in those amounts was $111 million and $118 million for the quarters ended March 31, 2015 and 2014, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 45 basis points and 49 basis points of average FFELP Loans in the quarters ended March 31, 2015 and 2014, respectively. The decrease in operating expenses from the year-ago quarter was primarily the result of the decrease in the average servicing rate paid.
The following table includes “Core Earnings” results for our Private Education Loans segment.
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Quarterly “Core Earnings” were $77 million compared with $74 million in the year-ago quarter. This increase is primarily the result of a $16 million decrease in the provision for Private Education Loan losses, a $6 million increase in servicing fees and a $9 million reduction in expenses. This was partially offset by a $26 million decrease in net interest income due to a decline in the net interest margin and balance of the portfolio. “Core Earnings” key performance metrics are as follows:
Private Education Loan spread
Loans in repayment with more than 12 payments made
Cosigner rate
Average FICO
Private Education Loan Net Interest Margin
The following table shows the “Core Earnings” basis Private Education Loan net interest margin along with reconciliation to the GAAP-basis Private Education Loan net interest margin before provision for loan losses.
“Core Earnings” basis Private Education Loan yield
“Core Earnings” basis Private Education Loan cost of funds
“Core Earnings” basis Private Education Loan spread
“Core Earnings” basis Private Education Loan net interest margin(1)
GAAP basis Private Education Loan net interest margin(1)
The average balances of our Private Education Loan “Core Earnings” basis interest-earning assets for the respective periods are:
Total Private Education Loan “Core Earnings” basis interest-earning assets
Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.
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Private Education Loan Provision for Loan Losses
In establishing the allowance for Private Education Loan losses as of March 31, 2015, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improvement in credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio. On a “Core Earnings” basis, total loans delinquent (as a percentage of loans in repayment) have decreased to 6.9 percent from 7.8 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 3.6 percent from 3.9 percent in the year-ago quarter. The “Core Earnings” charge-off rate decreased to 2.9 percent from 3.3 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) decreased to 3.8 percent from 4.3 percent in the year-ago quarter.
The Private Education Loan provision for loan losses on a “Core Earnings” basis was $120 million in the first quarter of 2015, down $16 million from the first quarter of 2014. The decline from the year-ago period was a result of the overall improvement in credit quality and performance trends discussed above, leading to decreases in expected future charge-offs.
Operating Expenses — Private Education Loans Segment
Operating expenses for our Private Education Loans segment include costs incurred to service and collect on our Private Education Loan portfolio. Direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 27 percent and 32 percent in the quarters ended March 31, 2015 and 2014, respectively.
The following table includes “Core Earnings” results for our Business Services segment.
Servicing revenue:
Intercompany loan servicing
Third-party loan servicing
Guarantor servicing
Total servicing revenue
Other Business Services revenue
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“Core Earnings” were $86 million in the first quarter of 2015, compared with $116 million in the year-ago quarter. The decrease was primarily the result of lower asset recovery revenue, primarily related to a legislative reduction in certain fees earned and a lower balance of intercompany FFELP Loans serviced. Key segment metrics are:
Number of accounts serviced for ED (in millions)
Total federal loans serviced
Contingent collections receivables inventory:
Total contingent collections receivables inventory
In February 2015, Navient completed the acquisition of Gila LLC, an asset recovery and business process outsourcing firm serving more than 600 clients in 39 states. The firm provides receivables management services and account processing solutions for state governments, court systems and municipalities.
Revenues related to services performed on FFELP Loans accounted for 74 percent and 78 percent, respectively, of total Business Services segment revenues for the quarters ended March 31, 2015 and 2014.
Servicing Revenue
Our Business Services segment includes intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $101 billion and $103 billion for the quarters ended March 31, 2015 and 2014, respectively. The decline in the intercompany loan servicing revenue from the year-ago quarter was primarily due to the decrease in the average servicing rate paid as well as the decline in the average balance of FFELP Loans serviced.
Third-party loan servicing income increased $4 million from the year-ago quarter primarily due to third-party servicing provided to SLM BankCo.
The Company services student loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.2 million customer accounts under the ED Servicing Contract as of March 31, 2015, compared with 5.8 million customer accounts serviced at March 31, 2014. Third-party loan servicing fees in the quarters ended March 31, 2015 and 2014 included $31 million and $31 million, respectively, of servicing revenue related to the ED Servicing Contract. On June 13, 2014, ED extended its servicing contract with us to service Direct Student Loan Program federal loans for five more years.
Asset Recovery Revenue
Our asset recovery revenue consists of fees we receive for asset recovery of delinquent and defaulted debt on behalf of third-party clients performed on a contingent basis. The majority of this fee revenue is generated through collecting or rehabilitating defaulted federal loans. Asset recovery revenue decreased $22 million in the first quarter of 2015 compared with the year-ago quarter primarily as a result of the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduced the amount paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated. This legislative reduction in fees represents $40 million of the decrease in asset recovery revenue. This reduction was partially offset by higher asset recovery volume and revenue from the acquisition of Gila LLC.
Since 1997, Navient has provided asset recovery services on defaulted student loans to ED. This contract expired by its terms on February 21, 2015 and our Pioneer Credit Recovery subsidiary received no new account
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placements under the contract. We are engaged with ED to learn more about their decision and address any questions or concerns they may have. In addition, on March 9, 2015, Pioneer filed a bid protest with the U.S. Government Accountability Office (“GAO”) which was dismissed on March 13, 2015. This bid protest was dismissed from the GAO based upon overlapping jurisdiction. Following the bid protest dismissal, Pioneer filed its own complaint with the U.S. Court of Federal Claims, which complaint was consolidated with several similar cases filed by other private collection agencies. On April 16, 2015, Pioneer’s complaint, together with the other plaintiffs’ consolidated complaints, was dismissed for lack of jurisdiction. We are currently considering whether to appeal this decision.
Separately, we have submitted a response to ED’s request for proposals (RFP) in relation to a new contract for similar services. There can be no assurances that Pioneer will be awarded an extension of the existing contract, a new contract under the RFP or what volume of accounts might be placed with Pioneer.
Operating Expenses — Business Services Segment
Operating expenses for our Business Services segment primarily include costs incurred to service our FFELP Loan portfolio, third-party servicing and asset recovery costs, and other operating costs. The $21 million increase in operating expenses in the quarter ended March 31, 2015 compared with the year-ago quarter was primarily the result of incremental costs post-Spin-Off resulting from operating as a new separate company, costs related to the Gila LLC acquisition this quarter, as well as incremental third-party servicing expenses related to an $8.5 billion loan acquisition in the fourth-quarter 2014.
The following table includes “Core Earnings” results of our Other segment.
Net interest loss after provision for loan losses
Losses on sales of loans and investments
Overhead expenses:
Corporate overhead
Unallocated information technology costs
Total overhead expenses
Loss before income tax benefit
“Core Earnings” (loss)
Net Interest Loss after Provision for Loan Losses
Net interest loss after provision for loan losses includes net interest loss related to our corporate liquidity portfolio, partially offset by net interest income related to our mortgage and consumer loan portfolios.
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Gains on Debt Repurchases
We repurchased $530 million and $0 million face amount of our unsecured debt for the quarters ended March 31, 2015 and 2014, respectively, with no gains recognized. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
Direct Operating Expenses — Other Segment
In the year-ago quarter, we recognized $111 million of expense related to the settlement of regulatory matters (for additional information, see Part II. “Other Information,” Item 1. “Legal Proceedings — Regulatory Matters”). This regulatory expense in the year-ago quarter was the primary driver of the decrease in operating expenses from first-quarter 2014 to first-quarter 2015.
Overhead — Other Segment
Unallocated corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations. The increase in overhead expenses in first-quarter 2015 compared with the year-ago quarter is primarily due to incremental costs post-Spin-Off resulting from operating as a new separate company, as well as costs incurred to provide related support to SLM BankCo under various transition services agreements entered into in connection with the Spin-Off.
Financial Condition
This section provides additional information regarding the changes in our loan portfolio assets and related liabilities as well as credit quality and performance indicators related to our loan portfolio.
Average Balance Sheets — GAAP
The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.
Average Assets
Total interest-earning assets
Non-interest-earning assets
Average Liabilities and Equity
Non-interest-bearing liabilities
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Rate/Volume Analysis — GAAP
The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.
Three Months Ended March 31, 2015 vs. 2014
Interest income
Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.
Summary of our Student Loan Portfolio
Ending Student Loan Balances, net — GAAP Basis
Total student loan portfolio:
In-school(1)
Grace, repayment and other(2)
Total, gross
Unamortized premium/(discount)
Receivable for partially charged-off loans
Allowance for loan losses
Total student loan portfolio
% of total FFELP
% of total
Loans for customers still attending school and are not yet required to make payments on the loan.
Includes loans in deferment or forbearance.
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Ending Student Loan Balances, net — “Core Earnings” Basis
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Average Student Loan Balances (net of unamortized premium/discount) — GAAP Basis
% of FFELP
Average Student Loan Balances (net of unamortized premium/discount) — “Core Earnings” Basis
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Student Loan Activity — GAAP Basis
Acquisitions and originations
Capitalized interest and premium/discount amortization
Consolidations to third parties
Sales
Repayments and other
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Student Loan Activity — “Core Earnings” Basis
Acquisitions
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Student Loan Allowance for Loan Losses Activity — GAAP Basis
Less:
Student loan sales
Plus:
Percent of total
Troubled debt restructuring(3)
Student Loan Allowance for Loan Losses Activity — “Core Earnings” Basis
Other transactions
Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Private Education Loan Portfolio Performance—Receivable for Partially Charged-Off Private Education Loans” for further discussion.
Represents the recorded investment of loans identified as troubled debt restructuring.
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FFELP Loan Portfolio Performance
FFELP Loan Delinquencies and Forbearance — GAAP Basis
Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested extension of grace period during employment transition or who have temporarily ceased making payments due to hardship or other factors.
Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.
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FFELP Loan Delinquencies and Forbearance — “Core Earnings” Basis
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Allowance for FFELP Loan Losses — GAAP Basis
Allowance at beginning of period
Provision for FFELP Loan losses
Allowance at end of period
Allowance as a percentage of ending total loans, gross
Allowance as a percentage of ending loans in repayment
Ending total loans, gross
Allowance for FFELP Loan Losses — “Core Earnings” Basis
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Private Education Loan Portfolio Performance
Private Education Loan Delinquencies and Forbearance — GAAP Basis
Total Private Education Loans in repayment
Total Private Education Loans, gross
Private Education Loan unamortized discount
Total Private Education Loans
Private Education Loan receivable for partially charged-off loans
Private Education Loan allowance for losses
Percentage of Private Education Loans in repayment
Delinquencies as a percentage of Private Education Loans in repayment
Percentage of Private Education Loans with a cosigner
Average FICO at origination
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Private Education Loan Delinquencies and Forbearance — “Core Earnings” Basis
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Allowance for Private Education Loan Losses — GAAP Basis
Provision for Private Education Loan losses
Allowance as a percentage of ending total loans
Average coverage of charge-offs (annualized)
Allowance for Private Education Loan Losses — “Core Earnings” Basis
Reclassification of interest reserve(2 )
Loan sales and other transactions
Charge-offs are reported net of expected recoveries. The expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.
Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.
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The following tables provide the detail for our traditional and non-traditional Private Education Loans for the quarters ended.
GAAP Basis:
Ending total loans(1)
Allowance as a percentage of ending total loan balance
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment
Loans that entered repayment during the period(2)
Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.
Includes loans that are required to make a payment for the first time.
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“Core Earnings” Basis:
As part of determining the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.
At the end of each month, for loans that are 212 days or more past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which have defaulted since 2007 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $380 million and $334 million in the allowance for Private Education Loan losses at March 31, 2015 and 2014, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.
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The following table summarizes the activity in the receivable for partially charged-off Private Education Loans (GAAP basis and “Core Earnings” basis are the same).
Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” tables.
Use of Forbearance as a Private Education Loan Collection Tool
Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of recovery of the loan. Forbearance as a recovery tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.
Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the customer will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.
Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.
The tables below show the composition and status of the Private Education Loan portfolio aged by the number of months for which a scheduled monthly payment was received. As indicated in the tables, the percentage of loans that are in forbearance status, are delinquent greater than 90 days or that are charged off decreases the longer the loans have been making scheduled monthly payments.
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At March 31, 2015, loans in forbearance status as a percentage of loans in repayment and forbearance were 11.2 percent for loans that have made less than 25 monthly payments. The percentage drops to 1.4 percent for loans that have made more than 48 monthly payments. Approximately 56 percent of our Private Education Loans in forbearance status have made less than 25 monthly payments.
At March 31, 2015, loans in repayment that are delinquent greater than 90 days as a percentage of loans in repayment were 9.6 percent for loans that have made less than 25 monthly payments. The percentage drops to 1.5 percent for loans that have made more than 48 monthly payments. Approximately 47 percent of our Private Education Loans in repayment that are delinquent greater than 90 days status have made less than 25 monthly payments.
For the three months ended March 31, 2015, charge-offs as a percentage of loans in repayment were 9.4 percent for loans that have made less than 25 monthly payments. The percentage drops to 0.9 percent for loans that have made more than 48 monthly payments. Approximately 60 percent of our Private Education Loan charge-offs occurring in first-quarter 2015 made less than 25 monthly payments.
Loans in-school/grace/deferment
Loans in forbearance
Loans in repayment — current
Loans in repayment — delinquent 31-60 days
Loans in repayment — delinquent 61-90 days
Loans in repayment — delinquent greater than 90 days
Unamortized discount
Total Private Education Loans, net
Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment
Charge-offs as a percentage of loans in repayment
March 31, 2014
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Private Education Loan Repayment Options
Certain loan programs allow customers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of March 31, 2015.
Loan Program
Signature and Other
Smart Option
Career Training
$ in repayment
$ in total
Payment method by enrollment status:
In-school/grace
Deferred(1),
interest-only or fixed
$25/month
Interest-only or fixed
Repayment
Level principal and
interest
“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.
The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the customer. Customers elect to participate in this program at the time they enter repayment following their grace period. This program is available to customers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Customers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a customer participates in this program. On a “Core Earnings” basis, as of March 31, 2015 and 2014, customers in repayment owing approximately $2.9 billion (11 percent of loans in repayment) and $4.2 billion (15 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 7 percent and 9 percent were non-traditional loans as of March 31, 2015 and 2014, respectively.
The following tables provide information regarding accrued interest receivable on our Private Education Loans and our allowance for uncollectible interest.
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Liquidity and Capital Resources
Funding and Liquidity Risk Management
The following “Liquidity and Capital Resources” discussion concentrates on our FFELP Loans and Private Education Loans segments. Our Business Services and Other segments require minimal capital and funding.
We define liquidity as cash and high-quality liquid assets that we can use to meet our cash requirements. Our two primary liquidity needs are: (1) servicing our debt and (2) our ongoing ability to meet our cash needs for running the operations of our businesses (including derivative collateral requirements) throughout market cycles, including during periods of financial stress. Secondary liquidity needs, which can be adjusted as needed, include acquisitions of Private Education Loan and FFELP Loan portfolios, acquisitions of companies, the payment of common stock dividends and the repurchase of common stock under common share repurchase programs. To achieve these objectives, we analyze and monitor our liquidity needs, maintain excess liquidity and access diverse funding sources including the issuance of unsecured debt and the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities.
We define liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses or invest in future asset growth and business operations at reasonable market rates. Our primary liquidity risk relates to our ability to raise replacement debt at a reasonable cost as our unsecured debt matures. In addition, we must continue to obtain funding at reasonable rates to meet our other business obligations and to continue to grow our business. This ability to access the capital markets may be affected by our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.
Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change, from time to time, based on our financial performance, industry dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it might raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions.
We have unsecured debt that totaled $17.3 billion at March 31, 2015. Three credit rating agencies currently rate our long-term unsecured debt at below investment grade. These ratings could result in higher cost of funds, and our senior unsecured debt to trade with greater volatility. From May 1, 2014 (Spin-Off) to March 31, 2015, we issued $1.5 billion of unsecured debt at an average all-in cost of one-month LIBOR plus 3.88 percent and an average term to maturity of 7.3 years.
We expect to fund our ongoing liquidity needs, including the repayment of $2.5 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio, the predictable operating cash flows provided by operating activities ($499 million in first-quarter 2015), the repayment of principal on unencumbered student loan assets, the distributions from our securitization trusts (including servicing fees which are priority payments within the trusts) and the issuance of additional unsecured debt. We may also draw down on our secured FFELP and Private Education Loan facilities or issue term ABS.
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Sources of Liquidity and Available Capacity
Ending Balances
Sources of primary liquidity:
Total unrestricted cash and liquid investments
Unencumbered FFELP Loans
Total GAAP basis
Average Balances
Total “Core Earnings” basis
SLM BankCo(1)
For the three months ended March 31, 2014, includes $1.5 billion of cash and $1.4 billion of FFELP Loans.
Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and capacity available. Maximum borrowing capacity under the FFELP Loan — other facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered FFELP Loans. As of March 31, 2015 and December 31, 2014, the maximum additional capacity under these facilities was $12.5 billion and $13.2 billion, respectively. For the three months ended March 31, 2015 and 2014, the average maximum additional capacity under these facilities was $12.9 billion and $12.3 billion, respectively.
In addition to the FFELP Loan — other facilities, liquidity may also be available from our Private Education Loan ABCP facility. This facility provides liquidity for Private Education Loan acquisitions and for the refinancing of loans presently on our balance sheet. The maximum capacity under this facility is $1 billion and it matures in June 2015. At March 31, 2015, the available capacity under this facility was $653 million.
We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans comprised $6.3 billion of our unencumbered assets of which $4.5 billion and $1.8 billion related to Private Education Loans and FFELP Loans, respectively. At March 31, 2015, we had a total of $11.9 billion of unencumbered assets inclusive of those described above as sources of primary liquidity and exclusive of goodwill and acquired intangible assets.
For further discussion of our various sources of liquidity, our continued access to the ABS market, our asset-backed financing facilities, and our issuance of unsecured debt, see “Note 6 — Borrowings” in our 2014 Form 10-K.
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The following table reconciles encumbered and unencumbered assets and their net impact on GAAP total tangible equity.
Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans
Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans
Tangible unencumbered assets(1)
Mark-to-market on unsecured hedged debt(2)
Other liabilities, net
Total tangible equity — GAAP Basis
Excludes goodwill and acquired intangible assets.
At March 31, 2015 and December 31, 2014, there were $913 million and $794 million, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.
First-Quarter 2015 Financing Transactions
The following financing transactions have taken place in the first quarter of 2015:
Unsecured Financings:
On March 27, 2015, Navient issued $500 million in senior unsecured bonds.
Navient repurchased $530 million of unsecured debt.
FFELP Loan Financings:
On February 26, 2015, Navient issued $1.0 billion in FFELP Loan ABS.
Private Education Loan Financings:
On January 22, 2015, Navient issued $689 million in Private Education Loan ABS.
Shareholder Distributions
In March 2015, we paid a common stock dividend of $0.16 per share, up from $0.15 in the prior quarter.
We repurchased 14.7 million shares of common stock for $300 million in the first quarter of 2015. The shares were repurchased under our January 2015 share repurchase program that authorizes up to $1 billion of share repurchases, of which $700 million remained available at March 31, 2015.
Recent Second-Quarter 2015 Transactions
In April 2015, we issued $997 million in FFELP Loan ABS and repurchased $520 million of unsecured debt.
Counterparty Exposure
Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are discussed in the section titled “Financial Condition — FFELP Loan Portfolio Performance” and “— Private Education Loan Portfolio Performance.”
Our investment portfolio is composed of very short-term securities issued by a diversified group of highly rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by board of
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director approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and considering impairment.
Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All corporate derivative contracts entered into by Navient are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.
We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. See “Note 7 — Derivative Financial Instruments” in our 2014 Form 10-K for more information on the amount of cash that has been received and delivered to derivative counterparties.
The table below highlights exposure related to our derivative counterparties at March 31, 2015.
Exposure, net of collateral
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3
“Core Earnings” Basis Borrowings
The following tables present the ending balances of our “Core Earnings” basis borrowings at March 31, 2015 and December 31, 2014, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three months ended March 31, 2015 and 2014. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment. (See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” of this Item 2.)
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Adjustment for GAAP accounting treatment
GAAP balances
Secured borrowings comprised 87 percent of our “Core Earnings” basis debt outstanding at both March 31, 2015 and December 31, 2014.
“Core Earnings” average balance and rate
GAAP-basis average balance and rate
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Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with GAAP. A discussion of our critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, transfers of financial assets and the VIE consolidation model and derivative accounting can be found in our 2014 Form 10-K. There were no significant changes to these critical accounting policies during the first three months of 2015.
Interest Rate Sensitivity Analysis
Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at March 31, 2015 and December 31, 2014, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index and repricing frequency are different than the asset index. The earnings sensitivity is applied only to financial assets and liabilities, including hedging instruments that existed at the balance sheet date and does not take into account new assets, liabilities or hedging instruments that may arise over the next 12 months.
(Dollars in millions, except per share amounts)
Effect on Earnings:
Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities
Unrealized gains (losses) on derivative and hedging activities
Increase in net income before taxes
Increase in diluted earnings per common share(2)
If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.
Calculated based on “increase in net income before taxes.”
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Effect on Fair Values:
Other earning assets
Total assets gain/(loss)
Total liabilities (gain)/loss
A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.
During the three months ended March 31, 2015 and 2014, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income Contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.
In the preceding tables, under the scenario in which interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded
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with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease.
Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase 25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in both the March 31, 2015 and 2014 analyses is primarily the result of one-month LIBOR-indexed FFELP Loans being funded with three-month LIBOR and other non-discrete indexed liabilities. See “Asset and Liability Funding Gap” of this Item 3. for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivative and hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.
In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero.
Asset and Liability Funding Gap
The tables below present our assets and liabilities (funding) arranged by underlying indices as of March 31, 2015. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.
Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.
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Index
3-month Treasury bill
Prime
PLUS Index
3-month LIBOR
1-month LIBOR
1-month LIBOR daily
CMT/CPI Index
Non-Discrete reset(3)
Non-Discrete reset(4)
Fixed Rate(5)
FFELP Loans of $42.8 billion ($39.8 billion LIBOR index and $3.0 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.
Funding (by index) includes all derivatives that qualify as hedges.
Funding consists of auction rate ABS and FFELP and Private Education Loan — other facilities.
Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes the obligation to return cash collateral held related to derivatives exposures.
Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity.
The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges and, as a result, the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.
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FFELP Loans of $15.6 billion ($14.9 billion LIBOR index and $0.7 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.
Funding (by index) includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.
We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in recent years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.
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Weighted Average Life
The following table reflects the weighted average life of our GAAP and “Core Earning” assets and liabilities at March 31, 2015.
(Averages in Years)
Borrowings
Total borrowings
Disclosure Controls and Procedures
Our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2015. Based on this evaluation, our chief principal executive and principal financial officers concluded that, as of March 31, 2015, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our chief principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
On March 18, 2011, a student loan borrower filed a putative class action complaint against Old SLM in the U.S. District Court for the Northern District of California. The complaint was captioned Tina M. Ubaldi v. SLM Corporation et. al., Case No. C-11-01320EDL. The plaintiff brought the complaint on behalf of a class consisting of other similarly situated California borrowers. The complaint alleged, among other things, that Old SLM’s practice of charging late fees proportional to the amount of missed payments constituted liquidated damages in violation of California law; and Old SLM engaged in unfair business practices by charging daily interest on private educational loans. Following motion practice and additional amendments to the complaint, which added usury claims under California state law and two additional defendants (Sallie Mae, Inc., now known as Navient Solutions, Inc. (“NSI”), and SLM PC Student Loan Trust 2004-A), a Modified Third Amended Complaint was filed on December 2, 2013. Plaintiffs sought restitution of late charges and interest paid by members of the class, injunctive relief, cancellation of all future interest payments, treble damages as permitted by law, as well as costs and attorneys’ fees, among other relief. Prior to the formation of Sallie Mae Bank in 2005, Old SLM followed prevalent capital market practices of acquiring and securitizing private education loans purchased in secondary transactions from banks who originated these loans. Plaintiffs alleged that the services provided by Old SLM and Sallie Mae, Inc. to the originating banks resulted in Old SLM and Sallie Mae, Inc. constituting lenders on these loans. Since 2006, Sallie Mae Bank originated the vast majority of all private education loans acquired by Old SLM. The claims at issue in this case expressly exclude loans originated by Sallie Mae Bank since its inception. Named defendants are subsidiaries of Navient and as such the Ubaldi litigation will remain the sole responsibility of Navient Corporation. Plaintiffs filed their Motion for Class Certification on October 22, 2013. On March 24, 2014, the Court denied plaintiffs’ Motion for Class Certification without prejudice, but granted plaintiffs leave to file an amended Motion for Class Certification. On June 20, 2014, a Complaint in Intervention was filed on behalf of two additional customers representing a proposed usury sub-class. On June 23, 2014, Plaintiffs filed a Renewed Motion for Class Certification. On December 19, 2014, the court granted plaintiffs’ Renewed Motion for Class Certification regarding the claims concerning late fees, but denied the motion as to the usury claims. On January 30, 2015, Plaintiffs filed a motion seeking leave to file another amended complaint. On March 24, 2015, the Court denied Plaintiffs’ motion, denying their request to amend the complaint again. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection therewith.
On November 26, 2014, Marlene Blyden filed a putative class action suit in the U.S. District Court for the Central District of California against Navient Corporation, Navient, LLC, Navient Solutions, Inc., Navient Credit Finance Corporation, Navient Investment Corporation, SLM Corporation, Bank of New York, and the Bank of New York Mellon Trust Company, N.A. The complaint was captioned Marlene Blyden v. Navient Corporation et. al., Case No. 5:14-CV-2456. On December 2, 2014, plaintiff filed a First Amended Complaint. The plaintiff purports to bring the First Amended Complaint on behalf of a class consisting of other similarly situated California borrowers. The First Amended Complaint alleged that plaintiff and members of the asserted class were charged and/or paid interest at a rate above that permitted under California law. On February 4, 2015, Plaintiff filed her Second Amended Complaint, which drops SLM Corporation as a defendant, adds various securitization trusts as defendants, and adds claims for conversion and for money had and received. Defendants filed Motions to Dismiss the Second Amended Complaint on March 6, 2015. The plaintiff filed her Opposition on April 16, 2015, and Defendants filed Replies on April 20, 2015. A hearing on the motions is set for June 15, 2015. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection therewith.
We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Most of
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these matters are claims against our servicing and collection subsidiaries by borrowers and debtors alleging the violation of state or federal laws in connection with servicing or collection activities on their student loans and other debts. In addition, our collection subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts.
For a description of these items and other litigation to which we are a party, please see our 2014 Form 10-K.
The NSI Order also required NSI to ensure proper servicing for service members and proper application of SCRA benefits under a revised and broader definition of eligibility than previously required by the statute and regulatory guidance and to make changes to billing statements and late fee practices. These changes to billing statements and late fee practices have already been implemented. NSI also decided to voluntarily make restitution of certain late fees to all other customers whose loans were neither owned nor originated by Sallie Mae Bank. They were calculated in the same manner as that which was required under the FDIC Orders and are estimated to be $42 million. The process to refund these fees as well as amounts from the restitution fund is substantially complete.
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Under the terms of the Separation Agreement, Navient has agreed to be responsible and indemnify SLM BankCo for all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. As a result, all liabilities arising out of the regulatory matters mentioned above, other than fines or penalties directly levied against Sallie Mae Bank, are the responsibility of, or assumed by, Navient or one of its subsidiaries, and Navient has agreed to indemnify and hold harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank, therefrom. Navient has no additional reserves related to indemnification matters with SLM BankCo as of March 31, 2015 other than with respect to the FDIC Orders and the DOJ Order.
There have been no material changes from the risk factors previously disclosed in our 2014 Form 10-K.
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Share Repurchases
The following table provides information relating to our purchase of shares of our common stock in the three months ended March 31, 2015.
Period:
January 1 — January 31, 2015
February 1 — February 28, 2015
March 1 — March 31, 2015
Total first-quarter 2015
The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below, and (ii) shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.
In December 2014, our board of directors authorized us to purchase up to $1.0 billion of shares of our common stock, effective January 1, 2015.
The closing price of our common stock on the NASDAQ Global Select Market on March 31, 2015 was $20.33.
Nothing to report.
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The following exhibits are furnished or filed, as applicable:
Management Contract or Compensatory Plan or Arrangement
Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
(Registrant)
Somsak Chivavibul
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: April 30, 2015
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